Category “Open Book Management”

The Project Management For Profit System

April 25, 2012 by Roger

Can somebody please just tell me what the score is?

Several decades ago, while coaching my son and his friends in a first-year t-ball league, I had a very eye-opening experience. During the first game of the season, one of my precocious young charges came up to me and asked what the score was. I gently explained that in this league, we didn’t need to keep track of the score. Our goal was to teach the skills of the game, not to track wins and losses. The lad looked me straight in the eye and said disdainfully, “Well that’s just stupid. How are we supposed to know how to play the game if we don’t even know what the score is?!” His disgust was palpable as he turned away and trudged back to his spot on the bench. I was instantly just a little irritated, but not for the reasons that you may think. In fact, I was irritated because I agreed whole-heartily with my young (and somewhat obnoxious) tormentor. He was right…We should be keeping score! At this point I’m thinking “Well that’s another glorious lowlight for volunteer coaches everywhere…”

Shortly thereafter, I glanced over at my team and noticed that they were keeping track of the score themselves, using sticks on the dugout floor. Wow. These kids were bound and determined to know the score of the game, even if all of us well-meaning adults wouldn’t keep track of it for them. If I remember correctly, we won that game 6 sticks to 3…Not that I was keeping score or anything.

The takeaway lesson for me that day was this: No matter what age you are, no matter what task it is that you’re undertaking, in order to perform at your most effective levels you must know what the score is. Whether we admit it or not, the truth is that whatever game we’re participating in, the score dictates our basic human behaviors. Instinctually we all act differently whether we’re ahead or behind “late in the fourth quarter” of any venture, be it sporting, business, or just life in general. Our operational strategies automatically adjust and adapt to meet the needs dictated by our position on the scoreboard.

In this aspect, Project Management is no different than any other game. In order to know exactly how to manage the project; what to watch closely; what not to worry over; what to panic over; etc…..we must know what the score is at any given time. And the score in the project management game always has dollar signs in front of the numbers. Any time that we don’t know where we stand (or worse yet, have a falsely-inflated view of where we stand), our chances of winning the game decrease dramatically. As that 5 year-old ball player once chastised me, “How are we supposed to know how to play the game if we don’t even know what the score is?” If a project manger can use that score to help him consistently play at the most effective levels, his chances of winning the game with successful projects that net windfall profits increase exponentially.

But the problem is, very few project-based companies can actually tell you where they stand on the financial scoreboard at any given time. Very few project managers really know what the financial score is on their projects until they are long-completed. Unfortunately, this is an all too common tale that I’ve lived through personally time and time again.

After nearly two decades of project management experience in a variety of industries, I came to work at Setpoint as a contract project manager in early 2004. From day one I could see that the “Setpoint way” of tracking project financial progress was like nothing I’d ever seen or experienced. I was amazed (and at first, just a little skeptical) when Setpoint project managers were able to consistently calculate their project earnings in nearly real time. In my previous business experiences, this level of financial tracking was not only unheard of, but in fact, I’m quite sure it would have been laughed off as impossible if anyone had been silly enough to even bring up the possibility.

I quickly realized that by keeping close track of just a few critical project financial metrics, I too could pull off this near-magical feat of financial score-keeping that the Setpoint system facilitated. Being a numbers geek at heart, I not only accepted this new system, I embraced it to the utmost degree. Suddenly I was able to make decisions regarding my projects with a complete and thorough understanding of the financial impact that each choice would have on my project’s budget. And not some vague theoretical understanding of the financial impact. No, I could now put a solid dollar figure to every action, nearly every time.

My teams were now able to adapt operational strategies throughout the life of the project, with every financial impact measured and reported weekly. Now a strategy was not necessarily successful just because it solved an operational issue, it had to be financially effective, in order to be considered a success. My project strategies evolved based on this wonderful new financial enlightenment. Suddenly our weekly goals were measured with more than just a task list and a calendar.

I’ve always been a big believer in the age-old adage that says “Knowledge is power”. And the financial knowledge that we were able to generate and track with the Setpoint system was so powerful, it certainly played a huge part in establishing the solid financial foundation of Setpoint that lives on to this day. Without the precise and regular tracking that we’ve completed on every project every week, there’s a good chance that Setpoint may have fallen by the wayside years ago, a tragic victim of good-projects-gone-bad, like so many of our competitors over the years have done. The nasty truth of project-based businesses is this: You usually don’t get many ‘bad projects’ in a row before you get crushed. If things get out of control on several projects at once, you may find yourself in the express line to the business graveyard.

In the past two decades we’ve shared the fundamentals of the Setpoint system with many companies, including a number of our strategic business partners. Over time the management team at Setpoint realized that this system could be helpful to many companies that deal with similar challenges in monitoring and influencing a project’s financial success. And thus was born the ‘Profit Management for Profit’ (PMFP) system.

With the PMFP system, we’ve dissected the metrics and methods of the Setpoint system and reassembled them in a manner that nearly any small business can utilize to accurately track the financial success of their efforts. In our book Profit Management For Profit (Harvard Business Press June 26, 2012), we provide not only the metrics and equations needed to use the PMFP system, but also the philosophical and cultural aspects of the system that are so critical to it’s successful implementation in any business culture. What’s your current philosophy on project financial tracking? Are you able to announce the real-time financial score on your projects at the drop of a hat? Maybe you already think you know the score, or maybe you don’t even care what the score is. But if you and your company really do realize how critical the score is to the success of your efforts, then maybe some of the PMFP methods can help you.

The bottom line? You’d better have a very good method to consistently and accurately track the financial score of your efforts. If you don’t, you may be in trouble and not even know it. Because after all, how are we supposed to know how to play the game if we don’t even know what the score is?

Find out more about the PMFP system at: www.pm4profit.com

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Why does the huddle work at Setpoint Systems?

January 14, 2010 by Joe Knight

Setpoint Systems is an open book company. This means that our books are open to our employees. Even though we are a privately held company we choose to share our financial information.

When the company started in 1992, the engineer founders Joe Cornwell and Joe VanDenBerghe (aka the Joe’s) decided they wanted to share financials with their employees. As a project based company they found that the way their part-time CPA did the books with them did not give them a good measure of how the projects were performing financially on a week-to-week basis.

So the two Joes with the help of others developed a way of tracking their projects on a weekly basis that included hour tracking by labor section, material costs tracking, and earned value project management concepts. This allowed a fairly accurate measure of the financial performance for projects on a weekly basis. This type of the project financial analysis did not comply with GAAP (The Generally Accepted Accounting Principles). Their CPA did not like it but it made sense to them and their employees.

The weekly tracking process happens on a big white board where projects are measured for material costs and percentage progress every week. The key project number, that every employee follows, is GP or gross profit by project (at Setpoint GP is simply earned revenue by percent complete less actual material costs). After the gross profit by project is measured then we compare that to our week OE or operating expenses. You take GP – OE to measure our profit for the week.

We track closely three measures on our huddle board. First, is GP/OE. For us, 1.2 is good and anything less is not good enough to sustain the business. Second, we track what percentage of our labor is direct to our automation projects. Third, is GP per direct hour charged to projects. Everyone knows that if our GP per hour is over a key threshold and our percent direct is over a key threshold Setpoint will make a nice profit and GP/OE will be well over 1.2.

It’s actually a really simple system. We have a monthly and annual bonus that pays out based on beating minimum GP-OE targets for the month and year. We also train all of our employees on how the huddle board works and what the key metrics mean.

So why does our huddle work? Well I think that there are few things that have made this simple 15-minute weekly meeting work for Setpoint. First, it’s a simple way to track projects and everyone understands it. Second, we tie objective financial rewards to how the board looks. Third, we involve every employee in the process. In the weekly huddle every employee has a seat at the table.

The power of Setpoint’s weekly huddle is evident in the survival and success of this business. When a project is bad on the board, the assembly people blame the design and engineering people, the design and engineering people say the project was under funded when it was sold and blame sales. We are all together in the meeting and it needs to be worked out between these groups or we do not have a business. The huddle creates at Setpoint what I like to call ‘psychic ownership’. Ever though all the employs do not own stock in Setpoint they act like owners because they see the performance on a weekly basis and want the company to perform well.

We have seen this ‘psychic ownership’ express itself in many ways over the years. Recently, when a project was nearing completion some shop people approached our CEO and challenged the percent complete shown on a specific project. They were in final assembly and thought the machine was well beyond 90% complete but our project engineer had the number much lower on the huddle board thus lowering our GP-OE and bonus for the month. In short, our assembly people accused the project engineer of sandbagging on the project. After a brief review an adjustment was made. We’ve also had situations where percent complete has been challenged as being farther along than we really are.

With everyone involved the huddle really keeps us safe and accurate on our business. We believe the huddle process and the systems behind it is the single greatest asset that Setpoint Systems has.

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Cash Flow Traps

July 2, 2009 by Machel

Sweet!! Your company just received a 50% down payment on a project, let’s take everyone to dinner and buy that equipment we’ve been looking at.  Whoa there big fella, let’s think about this first.  Yes, you have cash, but the million dollar question is: Can you spend it?  Just like a lawyer the accountants answer is “not yet”, let’s look toward the future.  Just because you have a positive balance in your checking account, does not mean you have money to spend.  As opposed to the Government, they don’t think about this at all.

 The next question is: How long will this project last and what costs do I have before the next payment is received from your customer? Assume the project lasts 4 months, the down payment you received up front needs to be used to pay the salaries of the people working on that project, as well as any and all expenses associated with that project. Your company can get upside down in cash before you know it.  If you don’t receive any more money until the end of the project, you will have to borrow money from the bank or find some other financing just to finish the project. 

 Let’s assume some facts: 1st the total revenue on the project is $150,000 and you receive a 50% down upon receipt of order and the final payment is due when the project is delivered.  2nd costs for parts is 60% of the total project and you pay your vendors 30 days after receipt of PO from customer, and 3rd your operating expenses are $10,000 per month. 

 

Month 1

Month 2

Month 3

Month 4

Beginning Cash

0

$65,000

($35,000)

($45,000)

Received Cash

$75,000

0

0

$75,000

Cash Spent on Parts

0

$90,000

0

0

Operating Expenses

$10,000

$10,000

$10,000

$10,000

Ending Cash

$65,000

($35,000)

($45,000)

$20,000

 

As you can see, just because you have cash up front does not mean you have cash to use.  As a responsible company you want to make sure you have money in the bank to pay the salaries of your employees and pay your vendors.  You don’t want to be like California and issue IOU’s.  I’m not sure, but I don’t think that would go over well with your employees or your vendors.  If your employees don’t mind, please let me know they would be a great cash flow asset here at Setpoint.

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Open Book Finance – Setpoint’s Projects Board

May 4, 2009 by Kara

Joe Knight, the CFO here at Setpoint, talks about open book finances and how we track our projects. In our latest YouTube video Joe walks through our project board that let’s us know how we are doing on each project. He walks through how GP is determined as well as how much we have earned.

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Open Book Finance – The Board

March 5, 2009 by Kara

What do your numbers mean?  Here at Setpoint we practice Open Book Finances.  Every week we look at the numbers that show us how far along we are on our projects.  In our newest YouTube video Joe Knight, our CFO, talks about how we know if we are making money.  He shows some key ratios that can be used in any industry to measure this.

 

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Project Management: The Balance of Time and Money

February 24, 2009 by Bob

Managing a project consists of many tasks that need to be scheduled, delegated to the members of the team, completed, and followed up on by the project manager in order for the project to be successful.

One of the main tasks of the project manager is to track the overall progress and profitability of the project by the total hours and cost of goods charged to the project compared to what the bid has allotted.  At Setpoint we have an open book policy for all projects.  Anyone can go to the team board and see exactly what the progress is of any project at any time.  This board shows the project revenue, the bid cost of good sold (COGS), actual COGS, project gross profit (GP), earned GP, percent complete, the week’s hours, the week’s GP, the week’s GP per hour, and the GP per hour to date for each project.

Reporting these numbers can sometimes be a tightrope walk for the project manager who reports the progress of each of his projects to management and the team of assemblers and programmers working on them.  The management team wants answers to why the progress of the project is behind the forecast numbers he gave them at the beginning of the month.  The assembly and programming team members working on the project are wondering why the hourly rate is so low or they are expecting the percent complete to be much higher.  There are usually good answers for both teams.

As a project manager, I take the conservative approach.  Sometimes a projects progress is well ahead of the hours that were in the bid, and sometimes the cost of goods is less than what is in the bid.  This doesn’t often happen, but when it does I don’t like to take all the “good news” on the progress report until I am sure that all the parts have been accounted for in accounts payable and the majority of the debugging has been done on the machine.  Some people might call this “sandbagging,” I call it proper project management.  Can you be too conservative?  Sure you can.  But I ask you this; would you rather take all the “good news” at the point of discovery and find out later that one of the key, and very costly, components was not accounted for or was overlooked in the procurement state?  Maybe you find out the scope of the project was not communicated to the programmer correctly and you now have two more weeks of programming to do.  This is usually not the norm, but it happens.  You now have costs or time you need to “give back” on the next progress report, or several reports, making it look like you have made no progress when the team is still working hard on the project.

Yes, in reality the end result should be the same; but let’s say your team can earn bonuses for completing projects ahead of schedule and below cost.  I for one do not want to get the team excited about their efficiency and the prospect of getting a bonus for their efforts one week just to have it taken back the next.  It doesn’t help the morale of the team.  There is a “happy medium” for claiming the ‘good news” that differs from project to project.  This is one of the hardest tasks to conquer for a project manager.

So call me a “sandbagger,” I’m ok with that.

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Working with Lean Companies

January 15, 2009 by John

My experiences working with industrial companies over the past fifteen years has aided me in my understanding of the importance of lean manufacturing.  In the early 1990’s overhauling a company to run lean manufacturing practices might not have seemed practical to many.  The cost of upgrading and maintaining such ideas would be enormous and the thought of employees being displaced from their jobs was taboo.  During this period of time the companies that have been unwilling to make the changes necessary to work towards the lean goals were going out like the dinosaurs that they were.  The global economy now demands more.  Competition and profitability are huge factors in what makes a lean business practice essential.

Working for a lean company that provides lean automation is a great thing.  There are always new business theories and practices surfacing.  It’s exciting to work for a company where approval of ideas is asked of everyone.  All financial information is reviewed in a group meeting.  Any of our ideas to better the company and the products are taken in and analyzed.  If an idea is beneficial, everybody involved is rewarded and the company is bettered.  It’s a good feeling to be part of such a team.

Long live the lean!!!

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Financial Bailout

October 13, 2008 by Joe Knight

The following YouTube is my quick take on the financial crisis.  I think that a lot of the problems in our financial system come from a lack of understanding of the numbers.  I find this problem throughout the country when I am training.  We do not train our managers in business how to read financials.  The media makes it worse by feeding the fear with dire predictions and misinformation.

I am trying to explain how this financial crisis happened and why the solution will probably work.  On the other hand if the wide spread panic continues, we may be in for a rough ride.  We need to calm down and let the system correct…it will.

Also, if you get a chance read my book Financial Intelligence, it will give you a nice background on how to read the statements and what to look for in a company’s financials.  For you entrepreneurs, we just introduced Financial Intelligence for Entrepreneurs.

It was too long for one video so be sure to catch both part 1 & part 2.

Part 2:

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Keeping a Watchful Eye on your Project Gauges

September 29, 2008 by Roger

Previously in my career I worked as a Project Manager for a large project-based business.  Our product was amusement rides, and we had the tallest, fastest and coolest roller coasters on the planet!  Each of these projects were multi-million dollar in value, and they would generally last between 8 and 18 months from concept to installation.  These projects also were often on the cutting edge of technology, as we were constantly trying to find the proverbial ‘edge of the envelope’ for speed, g-forces and general panic-inducing thrills for the paying customers.  As you can probably imagine, projects of this size and nature were a nightmare for a project manager.  You had to keep the customer happy, the team on task, the project on schedule, and the budget under control. 

That last issue was never an easy task!  Customers in search of the perfect cool ride combined with engineers in search of the ultimate cool features constantly intersected with ever-fluctuating material costs.  to make this messy situation that much worse, you never knew how financially successful your project was until months after it was wrapped up and complete.  The bean-counters would huddle up, crunch all the numbers, allocate your overhead, and then see if you had any cash left over to throw into the profit bucket.  This all equated to ulcers for the project manager, constant worry by the finance gurus, and a general lack of the feeling of “being in control” of these nasty monster projects.  Once, when a particularly discouraging project had just concluded, I remember telling a colleague something like this:  “man I don’t manage these projects…I just get dragged along for the harrowing ride!”  All roller coaster puns aside, it was a pretty helpless feeling at times; and the fact that the financial tracking was so far behind the manufacturing and construction of the rides meant that budget-driven course corrections were almost non-existent.  You had to just spend whatever it took to get to the finish line, and then hope you had something leftover at the end to dump into that profit bucket.

Fast forward to today, here at Setpoint I have many of the same challenges that I did at the roller coaster factory: gray scope of work, customers clamoring for more, engineers looking for the best, etc.  But guess what?  I now have a saving grace.  What could THAT possibly be, you say?  Well I’m glad you asked, it’s gauges my friend!  If you can visualize the project as an airplane, and the project manager as the pilot, it’s easy to see that this aircraft desperately needs some gauges!  Big fancy gauges to measure the projects metaphorical airspeed, altitude and direction.  Without constant real-time feedback on those critical navigational parameters, this plane is gonna be in trouble; it’s just a matter of time, and we’re talking “auger into the side of a mountain” trouble!

So, what are these magical project gauges?  For our business, they are the priceless project whiteboards that we update meticulously and review weekly with our entire company on Monday afternoons.  These boards are a key component of the Open Book Management philosophy that Joe has described in the excellent blog previous to this one.  Here at Setpoint, we love Open Book, we live Open Book.  Each project has a line on the board that details the ongoing project revenue, material costs (both actual and projected), labor hours invested, project gross-profit per hour (both for each week and cumulatively for the life of the project), and forecasted versus actual completion percentages of the project.

Every Monday afternoon we gather our entire company around these boards and the project manager briefly explains to everyone where each project stands on the critical and often brutal scope-schedule-budget trifecta.  This can, on occasion, be a very painful experience for the project manager, as his words are sometimes a forewarning of pending financial impact to the project, which translates directly to bonus money slipping right out of everyone’s pockets.  Obviously, that’s never a fun conversation to have with folds.  However painful this early warning system may be in that respect, it’s MUCH BETTER than just waiting until it’s over to see how your profit score turns out.  Why?  Because once we identify a problem early on we can make course corrections to try and minimize or eliminate the negative financial and/or schedule impacts.

Invariable, when an issue like this comes up in our Monday huddle, it’s always followed by a company-wide discussion/brainstorm session that more often than not presents viable solutions to the problem.  The bonus checks are saved, the project gets what it needs, the project manager is taken off suicide-watch, and the team camaraderie is ratcheted up a few notches on those days.  It’s really quite a wonderful sight to behold.  Our examples of successful mid-course corrections are many, and the ability to do those sorts of things makes life reasonably bearable for a harried project manager.  Instead of feeling like he has to solely carry the burden of the problem, he knows that the whole company will be right behind him to help grab the wheel, pull back on the stick and keep our airplane from auguring into that upcoming mountainside.  In comparison to the old days at the roller coaster factory, the best we could do there was when someone came along months after the crash and said something to the effect of “Hey did you know that you were flying too low when you hit that mountain?”  Well DUH!  Where was that nugget of knowledge 6 months ago!?!?!?!?!?

What are your project gauges?  Can you tell when the mountain is coming at you, or are you destined to know of the crash only when you’re picking up the pieces of the aftermath?  Get yourselves some gauges kiddies, today, or sooner for that matter, and watch them closely.  Keep that nice shiny project-plane in the air where it belongs!  And what do you call a non-airborne project-plane?  A scrap pile!  Please, stay off the pile if you can.  Your sanity will thank you for your efforts, I promise.

Keep your eyes on those project gauges folks!!!

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Open Book Management at Setpoint

September 22, 2008 by Joe Knight

Setpoint Systems, Inc. is an open book company, which means we open our books to our employees.  Every Monday at 1:00 pm we gather together to see how the prior week went financially.  It’s been that way at Setpoint pretty much from the beginnings of the company in 1992.

After arguing with their CPA and trying to understand QuickBooks, the founding Joe’s became confused and were looking for help.  I was working as a financial consultant after starting my career at Ford.  Joe Cornwell called me and asked if I could help him with his challenges in finance.  I remember Joe bringing me into Setpoint Systems which at the time had 5 employees, the two Joe’s and three others.  It was in the evening and it was just me and him.  He said “why do you finance guys have to make this so hard?”  He then went to the white board and said this is all that matters.  Then he wrote the following on the white board:

           Sales
– Stuff to Buy
——————————-
Aggregate Remainder

I told Joe C. that in finance we called aggregate remainder gross profit.  Joe told me that it is so great you finance guys have a name for that number because that is an important number in business.  So instantly I became the gross profit expert for Setpoint.  Later I would become a co-owner and CFO for the business.

Over the years we have developed our own system for tracking financial success in our business.  We have used Joe C.’s philosophy to keep it simple.  I told Joe that we did not need to follow GAAP (the Generally Accepted Accounting Principles) which is what his CPA was requiring.  Since we were a private company, we could present the numbers in a way that makes sense to our employees and managers.  I could take our home cooked numbers and present them to our banks and the IRS for taxes in the right format after the fact.

We developed three training courses on the income statement, balance sheet and cash flow.  We started a bonus plan based on our financial performance.  Along the way we realized that we had developed a unique open book approach to manufacturing automation equipment.  We now realize that the weekly board and our tracking system that is behind us is our single best asset in the business.

Over the years we have seen competitors come and go.  We have seen our employees work through problems on our books.  Recently one of our project engineers was under on the accrued profit on a very profitable job.  When it was presented on our board several of our shop employees challenged the numbers.  They knew that the conservative reporting understated the profits of the business for the month which would affect their bonuses for the month.  So our project engineer was forced to update the profit on the project more accurately.

I could tell several stories like this one.  Over the years our system has kept us honest.  When the board looks bad we have all worked together to solve the problems and when the board looks good we share in the success through bonuses.  If you are interested in learning more about Setpoint Systems open finance approach you are welcome to visit us on a Monday at 1:00 pm in Ogden, Utah.  Our system was featured in an article in Inc. Magazine, September, 2001 issue.

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